Nortel on the offensive in China

Beijing  Nortel Networks Corp.'s Chinese operations are a paradox. Sheltered from the accounting storms buffeting the parent company, they are at the centre of a competitive typhoon in their own back yard.

The Nortel executive with the best view of this dichotomy is Robert Mao, president of the Canadian telecommunications giant's large and well-established Chinese unit.

As he travels back and forth between Beijing and Canada, he is struck by the intense media pressure in North America, as Nortel struggles through governance and financial challenges.

"We are not faced with the same kind of attention [in China], which is a blessing," says Mr. Mao, who has headed Nortel Networks (China) Ltd. for seven years, during which the parent company has had four CEOs.

His Chinese customers, largely state-controlled telephone companies, view Nortel as the quintessential Canadian institution, he says, in words that investors in Canada would undoubtedly find comforting.

"To some degree they say that as long there is Canada, there will be Nortel. The transient perturbations will occur but Nortel will always be there."

What does concern his customers is the capacity of telecommunications suppliers, such as Nortel, to respond promptly to their research and product development demands.

"If you really want to compete in the China market, you have to have R&D capabilities to address the Chinese-specific [product] requirements," Mr. Mao says.

The Nortel executive was born in mainland China, raised in Taiwan, and trained as an engineer in the United States.

That R&D capability is critical as China emerges as a high-stakes telecom battleground.

China is no longer just a huge market, but a manufacturing base from which global telecommunications giants are attacking markets worldwide.

This offensive is led by home-grown companies such as Huawei Technologies Co. and ZTE Corp., which have capitalized on the dramatic widening of the Chinese telecom market.

More than 40 per cent of the Chinese population, or close to 600 million people, now have telephones, compared with less than 1 per cent just over a decade ago.

But these Chinese telecom giants are now aggressively exporting their technology and pushing their own product standards in areas such as 3G wireless and optical networking, where Nortel is also a player.

In China, Mr. Mao says, the challenge is "to compete with them to serve the customer," which means responding quickly to even small product variations -- for example, the shape of a logo on a cellular subscriber's screen.

"If a Huawei can do it overnight, and a Nortel can do it in three months, guess who gets the business," says Mr. Mao, who joined Nortel in 1997, after heading French telecom giant Alcatel SA's China unit.

Nortel chief executive officer William Owens has acknowledged the threat from Chinese companies, saying they have already moved beyond their home markets much faster than Nortel had expected.

"Their cost structures are low, they have smart people, they have more and more PhDs and they're very dedicated," he recently told the New York Times.

Mr. Mao points out that the cost of maintaining a Chinese R&D professional, in terms of facilities, wages and other expenses, is about one-third the level in North America -- "and with the same productivity," he adds.

Nortel's commitment to China was underscored by last year's announcement of a three-year, $200-million (U.S.) investment that would double the employees in its R&D centre in Beijing. (A Nortel spokesperson says the company does not break out R&D staffing by region.)

By contrast, Nortel announced, as part of recent global job cuts, the elimination of 750 jobs in Ottawa, most of them at its 6,000-employee R&D campus there.

Mr. Mao says Nortel still relies on Canada for more than half its global R&D, and the Ottawa operations perform the core research. But the key to its future is complementing core Canadian work with R&D in emerging large markets, such as China and India.

"If we didn't do R&D in China, we could not compete in China," he says, "and Nortel over all would have a smaller market share and that smaller market share would have to sustain our Canadian R&D."

Nortel, which has been selling into China for 30 years, employs about 1,500 directly in the country and another 1,500 in joint ventures.

Outside commentators say it garners about 10 per cent of its sales in China, although the company does not break out its Chinese revenue.

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